Brazilian President Dilma Rousseff used her veto power to exclude existing contracts from a bill to more widely distribute oil royalties, officials said.
Rousseff's veto of Article 3 of the bill, passed by Congress last month, was a victory for oil-producing states, especially Rio de Janeiro and Espirito Santo.
The president, however, left intact clauses that provide broader distribution of oil royalties in the future awarding of oil blocks.
Rio de Janeiro Gov. Sergio Cabral has estimated that his state would have lost nearly 3.4 billion reais (some $1.6 billion) annually as of 2013 if the bill had been left unchanged.
That would have depleted the state's budget and left it unable to fund infrastructure projects ahead of the Summer Olympics in 2016, he argued.
In addition to vetoing the bill's most contentious section, Rousseff sent Congress an executive decree requiring all regional and municipal governments to use royalties from future oil production contracts for investments in education.
"This is a decision with great historic significance," Education Minister Aloizio Mercadante said Friday in a press conference.
Presidential chief of staff Gleisi Hoffman said in the same press conference that Rousseff's decision upholds the constitution and protects existing contracts, while guaranteeing broader distribution of the country's oil wealth and bolstering education.
The bill as signed by Rousseff on Friday reduces producing states' royalty take from future production contracts from 26 percent to 20 percent.
The royalty issue is critical to ensure all of Brazil benefits from the development of fields in the recently discovered pre-salt region, so-named because it is located far below the ocean floor under a shifting layer of salt up to two kilometers (1.2-miles) thick.
Distributed across roughly 160,000 sq. kilometers (62,000 sq. miles), that region is projected to hold tens of billions of barrels of light oil and could potentially transform the South American country into a major exporter of crude and derivatives.
A licensing round for new oil blocks has been on standby pending resolution of the royalty issue. EFE